Edited version of private advice

Authorisation Number: 1051560181183

Date of advice: 22 October 2019

Ruling

Subject: Employee share plan

Question 1

Will the cancellation of the Share Units give rise to a CGT event?

Answer

Yes

Question 2

Will the Taxpayer be entitled to the capital gains discount where the Share Units are held for a period of more than 12 months prior to their cancellation?

Answer

Yes

Question 3

Will the Taxpayer be entitled to the capital gains discount on the disposal of shares where the shares are held for more than 12 months prior to their disposal?

Answer

Yes. Note that the relevant period starts from when the Taxpayer acquires the share/s in full or part satisfaction of the Cancellation Entitlement or Remuneration Payment.

Question 4

Will the Remuneration Payment be assessable to the Taxpayer as ordinary income?

Answer

Yes

Question 5

Will the debt owed by the Taxpayer to the Trustee be considered a deemed dividend under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

This ruling applies for the following periods

Year ended 30 June 20YY

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Legislative references made are to the Income Tax Assessment Act 1997 unless otherwise stated.

1.     The Taxpayer is an Australian resident.

2.     The Taxpayer is not a temporary resident within the meaning of subsection 995-1(1).

3.     The Taxpayer is an employee of the Company.

4.     The Taxpayer is not subject to the taxation of financial arrangements in Division 230 in relation to gains and losses on their Share Units.

5.     The Taxpayer does not and has not owned or held a beneficial interest in, any shares of the Company.

6.     The Taxpayer is not an associate or former associate of a shareholder of the company.

The Company Employee Share Plan

7.     The board of directors (the Board) of the Company established the Company Employee Share Plan (the Plan) to recognise the work and ongoing commitment of employees for their contribution to the building of the Company. For this purpose the Board established the Company Employee Share Trust (the Trust).

8.     The Plan was designed to meet the following objectives.

·                 support employee retention

·                 enhance employee involvement and focus, and

·                 increase wealth distribution among employees.

9.     Eligible employees may be invited to participate in the Plan by applying for Share Units in the Trust.

10.  A Share Unit gives the holder an entitlement to receive a trust distribution for an income year equivalent to any income earned (including dividends) in respect of shares (Allocated Shares) and other assets (Relevant Assets) referrable to that share unit in that income year. It also entitles them to receive a Cancellation Entitlement upon cancellation of their Share Units.

11.  Unless the Company is listed on ASX, the Share Unit Holder cannot:

a) direct the Trustee how to vote in relation to (or "regarding") Allocated Shares; or

b) direct the Trustee to dispose of Allocated Shares (including by transferring the Allocated Shares to Share Unit Holder).

12.  The Share Unit Holder will not be able to direct the Trustee to participate in any rights issue by the Company (whether or not the Company is listed on ASX).

13.  The Company or its shareholders may require the Trustee to sell Allocated Shares in certain circumstances without obtaining Share Unit Holder consent. Where this occurs, Share Unit Holder Share Units would confer an interest in the proceeds from such sale.

14.  Where the Trust holds assets that are not Allocated Shares or Relevant Assets. In such a case, these other assets are held for the benefit of current and former 'Employees' as a general class.

15.  The Trust Deed allows the Company to settle any contributions on the Trust as they see fit. The Company will make contributions to the Trust to allow the Trust to make Cancellation Payments, Remuneration Payments and to acquire shares for the purpose of allocating them to Share Units.

Financing Share Unit Holder acquisition of Share Units

16.  The issue price of a Share Unit will be equal to the market value of an ordinary share at or about the date of issue of the Share Unit.

17.  The Trustee will fund the acquisition of the Share Units on the employee's behalf. The employee will then be indebted to the Trustee for the amount funded. The debt will not attract interest and will only be repayable upon the cancellation of the relevant Share Units, which will give rise to a Cancellation Entitlement (discussed further below).

18.  The Trustee will use funds settled on it by the Company to purchase the shares. The Company will not claim a deduction for the settlement of funds on the Trust.

19.  The Company will issue new shares to the Trustee to fund the subscription of Shares, at least until the Company is listed. The Company will not claim a deduction for the issue of such shares.

20.  Any Cancellation Entitlement due to Share Unit Holders in connection with the cancellation of the Share Units will be automatically applied to the debt owed by Share Unit Holders to the Trustee for the relevant Share Units.

Cancellation of Share Units

21.  Share Unit Holders may not transfer, assign or otherwise deal with Share Units.

22.  Share Unit Holders may request the Trustee to cancel their Share Units in the circumstances described below.

23.  Unless and until the Company is listed on ASX, Share Unit Holders may only request cancellation of their Share Units during periods approved by the Company. The Company currently intends to provide trading windows during which Share Unit Holders may request cancellation each year. If the Company is listed, Share Unit Holders may request cancellation of their Share Units at any time.

24.  In addition, unless the Company agrees otherwise, all of the Share Unit Holder's Share Units will be automatically cancelled if:

a) the Share Unit Holder ceases to be employed by the Company; or

b) the Share Unit Holder commits any act of fraud or defalcation or gross misconduct in relation to the affairs of the Company, or materially breaches Share Unit Holder obligations to the Company, including by failing to comply with a policy with which Share Unit Holder are required to comply.

25.  Share Units will automatically be cancelled five years after the date the contribution used by the Trustee to acquire (or reallocate) the Shares underlying the Share Units was made.

26.  Where a Share Unit is cancelled and the Cancellation Entitlement is provided in cash, the Allocated Share referrable to that Share Unit shall be redesignated as an Unallocated Share, which are shares pending allocation to particular Share Units.

Cancellation Entitlement

27.  Where any of the Share Unit Holder's Share Units are cancelled, the Share Unit Holder will receive a Cancellation Entitlement in respect of those Share Units. This is in addition to the Share Unit Holder's entitlements to dividends payable in respect of the Shares that are referrable to Share Unit Holder's Share Units as at the time of cancellation.

28.  The value of the Cancellation Entitlement will be equal to the market value of the Allocated Shares and Related Assets for those Share Units as at the date of cancellation.

29.  No repayment of the debt owed by an employee to the Trustee for the purchase of a Share Unit is required until the cancellation of the Share Unit. At this time, the employee must repay the outstanding debt.

30.  The Trustee will set off the outstanding debt against the Cancellation Entitlement in respect of each Share Unit. The residual amount (excess Cancellation Entitlement), if any, will be provided to the Share Unit Holder.

31.  Where the outstanding debt is greater than the Cancellation Entitlement, the Trustee will accept the surrender and cancellation of the Share Unit as full and final satisfaction of any outstanding debt in respect of the Share Unit.

32.  The Company may decide that all or part of Share Unit Holder's excess Cancellation Entitlement will be satisfied by having the Trustee transfer Allocated Shares (or Related Assets) to the Share Unit Holder.

Remuneration Payment

33.  Where Share Units are cancelled, in addition to the Share Unit Holder's Cancellation Entitlement, the Trustee will pay to the Share Unit Holder an amount equal to the amount of the debt owed to the Trustee in respect of the Share Units, less any applicable withholding taxes (including Pay As You Go tax instalments) (Remuneration Payment).

34.  The Remuneration Payment will be provided to the Share Unit Holder on behalf of the Company as payment of remuneration for the Share Unit Holder's employment. The Company may decide that all or part of the Remuneration Payment will be satisfied by having the Trustee transfer Allocated Shares to the Share Unit Holder.

Determining market value

35.  The market value of a share will generally be that determined under the most recent independent valuation obtained, with any reasonable adjustments.

36.  If the Company is listed on ASX, the Market Value of a Share as at a particular date will be the weighted average market price at which Shares were sold on ASX during the five trading days immediately preceding that date (subject to reasonable adjustments).

37.  Indexation will not be taken into account when calculating the cost base of the Share Units or Shares.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 1A of the former Part IIIAA

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Former section 160APHO

Income Tax Assessment Act 1936 Section 100

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98A

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-55

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 207-145

Income Tax Assessment Act 1997 Section 207-150

Income Tax Assessment Act 1997 Section 207-25

Income Tax Assessment Act 1997 Section 207-35

Income Tax Assessment Act 1997 Section 207-5

Income Tax Assessment Act 1997 Section 207-50

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 207-45

Income Tax Assessment Act 1997 Section 207-55

Income Tax Assessment Act 1997 Subdivision 207-B

Reasons for decision

Question 1

Summary

38.  The cancellation of the Share Units gives rise to a CGT event C2 pursuant to paragraph 104-25(1)(a).

Detailed reasoning

39.  Paragraph 104-25(1)(a) provides that CGT event C2 happens if the ownership of an intangible asset ends by being redeemed or cancelled.

40.  Note 1 to section 108-5 specifically includes units in a unit trust as CGT assets. The Share Unit is therefore a CGT asset.

41.  Thus, the cancellation of the Share Unit will give rise to CGT event C2 pursuant to paragraph 104-25(1)(a).

42.  Pursuant to subsection 104-25(3), the Taxpayer will make a capital gain if the capital proceeds from the Share Unit ending are more than the Share Unit's cost base; and a capital loss of the capital proceeds are less than the Share Unit's reduced cost base.

43.  Subsection 116-20(1) states:

The capital proceeds from a *CGT event are the total of:

(a) the money you have received, or are entitled to receive, in respect of the event happening; and

(b) the *market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

44.  Thus, the market value of the Cancellation Entitlement (whether paid in cash and/or distribution of Shares) will form part of the capital proceeds for this event.

45.  Both the cost base and reduced cost base include the amount paid to acquire the CGT asset (subsections 110-25(2) and 110-55(2) respectively).

46.  Thus, the amount paid (in this case by debt) to acquire the Share Unit will form part of its cost base and reduced cost base.

47.  The Taxpayer will make a capital gain in relation to the cancellation of the Share Unit where the money and the market value of shares received as part of the Cancellation Entitlement exceeds the amount incurred to acquire the Share Unit. The capital gain will be equal to this excess.

48.  The Taxpayer will make a capital loss in relation to the cancellation of the Share Unit where the money and the market value of shares received as part of the Cancellation Entitlement is less than the amount incurred to acquire the Share Unit. The capital loss will be equal to the difference.

Question 2

Summary

49.  Where the Taxpayer holds the Share Unit for a period of at least 12 months prior to its cancellation, the Taxpayer will be entitled to a 50% discount on the capital gain made on the Share Unit, pursuant to subparagraph 115-100(a)(i).

Detailed reasoning

50.  Section 115-5 states:

A discount capital gain is a *capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

51.  The Taxpayer satisfies section 115-10 as they are an individual (paragraph 115-10(a)).

52.  Section 115-15 is satisfied as the CGT event happens after 21 September 1999.

53.  Section 115-20 is satisfied as no indexation will be taken into account in calculating the cost base.

54.  Subsection 115-25(1) states:

To be a *discount capital gain, the *capital gain must result from a *CGT event happening to a *CGT asset that was*acquired by the entity making the capital gain at least 12 months before the CGT event.

55.  'Acquire' is defined in subsection 995-1(1), which relevantly states:

a * CGT asset: you acquire a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109 (including under a provision listed in Subdivision 109-B );

56.  Section 109-5 provides that generally you acquire a CGT asset when you become its owner.

57.  Thus, the relevant period begins when the employee acquires the Share Unit, and ends at the time of the CGT event.

58.  Subsection 115-25(1) will be satisfied where the Share Unit is held for a period of at least 12 months prior to the CGT event.

59.  Thus, where the Taxpayer holds the Share Unit for a period of at least 12 months prior to its cancellation, the Taxpayer will be entitled to a 50% discount on any capital gain made on the Share Unit, pursuant to subparagraph 115-100(a)(i).

Question 3

Summary

60.  The Taxpayer will be entitled to the CGT discount on the disposal of a share where they have held the share for a period of more than 12 months prior to its disposal. The relevant period begins when the share is distributed to the Taxpayer in full or part satisfaction of the excess Cancellation Entitlement or the Remuneration Payment.

Detailed reasoning

61.  Subsection 104-10(1) states:

CGT event A1 happens if you*dispose of a *CGT asset.

62.  Thus, the disposal of the Share by the Taxpayer will lead to CGT event A1.

63.  For the same reasons given in Question 2, the Taxpayer will be entitled to the CGT discount where they have held the Share for more than 12 months prior to the CGT event.

64.  Pursuant to section 109-5, the relevant period begins at the time the Taxpayer becomes the owner of the Share.

65.  The Taxpayer does not own the share and has no right to, or interest in, the share before the time the Board decides to issue the share in full or part satisfaction of the Cancellation Entitlement or the Remuneration Payment.

Question 4

Summary

66.  The Remuneration Payment (whether paid by cash and/or shares) will be included in the Taxpayer's assessable income as ordinary income pursuant to subsection 6-5(2).

Detailed reasoning

67.  Subsection 6-5(2) provides that the assessable income of a resident taxpayer for a particular income year includes ordinary income derived, directly or indirectly, from all sources, whether in or out of Australia, during that income year.

68.  The legislation does not provide guidance on the meaning of 'income according to ordinary concepts' in section 6-5 of the ITAA 1997. However, guidance in determining whether a receipt will be ordinary income can be found in case law.

69.  In Scott v. Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215, Jordan CJ held that the meaning of 'income' was to be determined according to 'ordinary concept and usages' at 219 as follows:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts: A.-G. for British Columbia v. Ostrum ([1904] AC 144 at 147); Lambe v. Inland Revenue Commissioners ([1934] 1 KB 178 at 182-3).

70.  Ordinary income will generally have the characteristics of being periodic, recurring, and regular. However, a one-off payment may also be characterised as ordinary income where the payment has a sufficient connection with services rendered. This has been supported by decisions in Reuter v. FC of T 93 ATC 4037; (1993) 111 ALR 716 at ATC 4047; ALR 730.

71.  Salary, wages and bonuses paid in relation to an individual's employment is remuneration for services rendered as an employee and is generally considered to be income according to ordinary concepts.

72.  The Remuneration Payment is remuneration paid to the Taxpayer in respect of their employment and is thus income according to ordinary concepts.

73.  Thus, the Remuneration Payment will be included in the Taxpayer's assessable income as ordinary income pursuant to subsection 6-5(2).

Question 5

Summary

74.  Division 7A of the ITAA 1936 does not apply to the debt owed by the taxpayer to the Trustee for the purchase of the Share Unit as the Taxpayer is not a shareholder in the Company.

Detailed reasoning

75.  Division 7A of the ITAA 1936is applicable to payments or other benefits provided by a private company to its shareholders or associates of its shareholders.

76.  The earliest time the Taxpayer will become a shareholder of the Company, under the given facts, is upon cancellation of the Share Unit if the Board decides to issue a Share in satisfaction of the Cancellation Entitlement or the Remuneration Payment.

77.  However, as the Taxpayer is not currently a shareholder of the Company, Division 7A has no application here.